Bank Guarantee

In international trade, it is difficult for the buyer to accurately assess the professional ability and financial position of a supplier or seller. The situation is worst when both parties are domiciled in different countries. The buyer therefore, quite rightly, demands that the seller’s ability to perform be secured and for this purpose a Bank Guarantee (BG) is arranged. In general, the use of the BG as an instrument for securing payment is restricted in international trade to non-payment guarantees used for the “open account” mode of payment.

A BG may be defined as the “irrevocable obligation of a bank to pay a sum of money in the event of non-performance of a contract by a third party”. Similar to Letter of Credit, the guarantee is a separate obligation independent of the principal debt or the contractual relationship between the creditor and the principal debtor. Under the terms of the guarantee, the bank has to pay on first demand provided that the conditions contained in the guarantee are fulfilled. Guarantees are, as a rule, subject to the laws of the country of the issuing bank. Meaning to say, when a BG is issued by a bank in Malaysia, it is governed by the Malaysian laws. Under Swiss law, the parties are free to determine the contents and form of a guarantee. Generally, the contents of a BG more or less is standardized to suit to the issuing bank’s laws. However, minor adjustment is permissible subject to approval of the issuing bank. Issues or clauses not provided for would be adjudicated on basis of Article 111 of the Swiss Code of Obligations.

There are few example of related guarantees for securing performance or payment namely, the ‘simple’ guarantee (Swiss Code of Obligations, Art 495) and the ‘Joint and several’ guarantee (Swiss Code of Obligations, Art 496); by the contract of guarantee, the guarantor is obligated to make payment if the principal debtor becomes insolvent and goes bankrupt. The contract of guarantee presupposes a valid principal debt and also become void if the principal debt ceases to exist. In Switzerland, contracts of simple and/or joint and several guarantees are used almost exclusively for securing claims of domestic creditors.

The confirm payment order (Swiss Code of Obligations, Art 468); As in case of the guarantees, the irrevocable confirmed payment order includes an irrevocable, not accessory obligation to pay. Payments under this instrument can be subject to the fulfillment of the special conditions of this order. The documentary credit is an important case of application of the irrevocable, confirmed payment order.

As in the case of the documentary credit and the documentary collection, the International Chamber of Commerce in Paris has issued ‘Uniform Rules for Contract Guarantees’. But these guidelines issued in 1978 have not been generally accepted.